Welcome to the Evanridge Properties LLP Newsletter for the first half of 2011.
On the following pages you will find:
- Report on the Evanridge Swedish Property LLP/2LP AGM
- Portfolio Report and our current view on the Swedish property market
Investment Results
On the basis of the accounts for the Evanridge Sweden AB group, together with the audited 2010 accounts of Evanridge Swedish Property LLP and Evanridge Swedish Property 2LP the investments would have grown as follows:
- Evanridge Swedish Property LLP’s total initial investment of £2,857,830 has grown £5,415,815, a total increase of 89.51% over the investment period. Taking the average start date for the investment as 1st May 2006, this represents an average simple annual increase 19.54% per year to the end of December 2010.
- Evanridge Swedish Property 2 LP’s total initial investment of £1,634,746 has grown £2,562,760, a total increase of 56.77% over the investment period. Taking the average start date for the investment of 1st August 2007, this represents an average simple annual increase 16.60% per year to the end of December 2010.
Please note that these results do not take account any capital gains tax that may be payable in Sweden, or of the effect of any carried interest or other profit share which would be due to Evanridge LLP as General Partner or Managing Member.
What does it all mean?
Bryony Fitzgerald presented a “layman’s guide” to the accounts, explaining how operating profits generated in Sweden flow back to Evanridge Swedish Property LLP and 2LP, and ultimately to the individual investor. The mechanism by which returns are generated and the potential impact of carried interest was explored further.
This was followed by a discussion of possible exit strategies for the partnerships from 2013 onwards and exit/continuation options for individual investors at that point. Should you wish to discuss these options in greater detail for your individual circumstances then please don’t hesitate to give us a call.
Re‐appointment of the Auditors
As Nexia Smith and Williamson (Bristol) had conducted this year’s audit process in an efficient and timely manner, it was recommended that the firm be re‐appointed as auditors to Evanridge Swedish Property LLP and 2LP. The proposal was carried unanimously.
Copies of Accounts
Copies of the audited accounts for Evanridge Swedish Property LLP were circulated with the notification of the AGM. If anyone would like an additional copy, then please get in touch and we will forward one.
Property Report
Following the review of the audited accounts, Nigel Evans gave a report on the status and management of the current portfolio, together with an update on the economic situation in Sweden, particularly the southwest, at the present time. The content of this report is included below for the benefit of those investors unable to attend the AGM.
Report on the Property Portfolio
With all funds invested since early 2009, the ESAB portfolio remains at 3 commercial buildings and 185 apartments spread out over the towns of Lilla Edet, Trollhättan, Värgon and Vanersborg.
The total portfolio was valued at 180mSEK as of Dec 31 2010 which was equivalent to £17.1m at the exchange rate applicable on that date.
2010 – A challenging year
Rental income was down and operating costs were up in 2010 leading to a 36% drop in operating profit to £185,000, compared to £291,000 in 2009. There were 3 contributing factors to this result:
- We experienced two extreme weather events at either end of the year, with the snowfalls of Nov and Dec being some of the heaviest experienced in the area for over 40 years. This led to much increased snow clearance costs, circa £37k, plus emergency repairs ue to snow and frost damage of circa £10k.
- As reported at last years’ AGM , one of our industrial units, Plastkannan, had approx 40% vacant space due to the tenant (a supplier to SAAB) having re‐structured their business. At the time of the AGM we were in discussions with this tenant to take up some of the extra space. These discussions were successful, however the expansion was delayed until the end of 2010, so rental income was lower than budgeted for 2010.
- At Lilla Edet we made the decision to upgrade the apartments and re‐let to tenants who could afford a higher rent. This process started in the final quarter of 2010 and the refurbishment and re‐letting was greatly hampered by the bad weather, which had the effect of reducing the residential rental income compared to budget.
Outlook for 2011
Unlike previous years when the portfolio required very little work apart from routine maintenance, 2011 will reverse that trend with a program of repairs to areas suffering from frost and snow damage. This cost was estimated at approximately £20k, but having started the work, indications are that the total cost should be lower than first thought. Some remodelling of one of the commercial buildings will be undertaken to
accommodate new tenants (estimated cost <10k).
To counteract these increased costs, our rental income should be higher in 2011 as we will have increased lettings in both the commercial and residential, plus a rent rise of 2.2% has been agreed between the tenant and landlord associations for 2011.
The forecast net result of the above that ESAB operating profit will be fairly static in 2011 compared to 2010.
We currently have 6 apartments vacant, 3 of which are having frost damage repaired. With 185 apartments this represents a vacancy rate of approximately 3%. On the commercial side, once the new commercial tenants move in, we will achieve almost 100% occupancy of our commercial space - our highest level ever.
An Opportunity to Add Value
One of the attractions of the first apartment building which Evanridge bought in Sweden, apart from the quality and location, was the potential opportunity to develop the carpark at the rear of the building. At the time of purchase we met with the local planning department and they were not averse to the idea of us constructing some apartments on this area at a future date.
We have left the project on the backburner until now, mainly because construction costs have been so high and rents would not support the cost of the development, but it appears that now may be an opportune moment to progress it for the following
reasons:
- The government and local community is encouraging the construction of new apartments to meet the housing shortage.
- Build costs have reduced due to lower construction activity over the last few years.
- Recent legislative changes make apartment construction more attractive, i.e. it is now possible to sell the apartments in one of two ways (as a direct sale of an individual apartment or as a ‘co‐operative sale’) .
- The economy of Trollhättan and the surrounding area is growing with an accompanying increase in demand for apartments.
As such, we have retained an architect and project manager, and a set of plans have been produced with an application for outline planning made to the Trollhättan municipality.
We have applied to construct 9 floors with 22 apartments. This may not be acceptable in terms of building height but it was submitted in the hope of receiving permission for 7 floors and 16 apartments. Initial response from the planning department has been favourable. Subject to the vagaries of planning, we anticipate starting construction this autumn, with completion sometime in early 2013.
Financing of the project will be achieved via pre‐sale deposits and a construction loan, and construction will not commence until significant pre‐sales have been achieved. In other words, the project will not be undertaken speculatively.
Marketing will commence as soon as detailed planning consent has been received. We have already received enquiries from prospective purchasers, so the prospects of achieving sufficient sales to make the project worthwhile are looking promising.
Property Market Overview
With slow growth in the developed world, and a tendency towards overheating in the economies of the developing world reducing export demand and the economic output of many countries, the current strong growth in Nordic countries, driven by domestic and international demand, is acting as an engine of economic growth in Northern Europe.
Consequently, Scandinavia and in particular Sweden is a big attraction for property investors looking to cash in on the positive effect this economic growth is having on retail, office and residential property rental and capital values.
Peter Wiman, head of research at Savills Sweden.
Savills researchers note a strong interest from international investors in Sweden but say the market is still predominantly driven by domestic players such as Swedish institutions and pension funds. With debt finance for commercial property becoming easier to obtain, Savills also noted that by the end of the first three months of 2011 the total property turnover in Sweden reached SEK 19.5 billion, up from SEK 18.5 billion for the corresponding period of 2010. This upward trend began last year as investment volumes increased each quarter in 2010 compared with the same quarters in 2009.
With the investment fundamentals of residential and commercial property remaining sound, positive yield spreads on offer and attractive financing options, careful investment in Swedish property continues to offer the prospect of positive returns.
Overview of Swedish Economy
All the Nordic countries have shown strong growth in the last year, very much underpinned by stable macro‐economic fundamentals, such as:
- Low sovereign debt
- Competitive export industries
- Sound consumer finances
- Strong government finances
In Sweden these positive attributes are joined by healthy banks and growing employment, driven by a strong export demand for its products as a result of competitive industrial production.
Real disposable incomes grew throughout the economic downturn and are forecast to grow in real terms by 3% in 2011 and 2012, due to rising incomes, lower taxes and low inflation. All of these factors continue to support the growing household consumption and high savings ratio which is forecast to remain in the 4‐6% range, continuing the trend of the last decade.
Some concerns exist regarding the rise in owner occupier house prices over the last few years. Whilst the risks to economic stability are considered to be low, steps have been taken by the Swedish government to limit further potential development of a housing bubble, namely limiting the maximum ’Loan To Value’ of mortgages to 85% of the property value, applying higher interest margins and introducing debt to income caps.
With a balanced economy and minimal exposure to the financial problems of many other countries, Swedish banks remain in robust financial health with capital adequacy ratios well in excess of the recently introduced Basel III requirements.
In conclusion, it is reassuring to note the following:
INTERNATIONAL MONETARY FUND Concluding Statement of the Article IV Consultation Mission May 2011,
Evanridge Sweden 3 AB Investor Meetings
Evanridge Sweden 3 AB remains open to further investment and we will be holding a series of investor meetings around the country this autumn. If you are interesting in investing or would just like to attend a meeting to find out more, please drop Bill or Nigel a line and they will let you know when and where the nearest meeting will be held.
A Polite Request If you like what we are doing, please don’t keep us a secret
Download the full newsletter here Newsletter for the first half of 2011 (.PDF 600kb)